ROLE OF COMMERCIAL BANKS IN FINANCING SMALL AND MEDIUM SCALE ENTERPRISES IN NIGERIA: CASE STUDY OF LAGOS STATE

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ROLE OF COMMERCIAL BANKS IN FINANCING SMALL AND MEDIUM SCALE ENTERPRISES IN NIGERIA: CASE STUDY OF LAGOS STATE

CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

Small and Medium Enterprises (SMEs) have been recognized as a driving force for economic growth in any nation. They are also perceived as the key to Nigeria’s economic growth, poverty alleviation, increase productivity level in a nation, and employment generation in recent years has generated a lot of research interest on their challenges and prospect. In recognition of the role of Small and Medium Scale Enterprises in the economic growth process of Nigeria, government has taken concerted efforts to foster the growth of Small and Medium Scale Enterprises and also develop entrepreneurship. Small and Medium Scale Enterprises are of necessity to a nation’s industrialization process. One foremost way of promoting Small and Medium Scale Enterprises is by having easy access to finance. Finance is of high importance to the growth of Small and Medium Scale Enterprises. Afolabi (2013) noted that a major gap in Nigeria’s industrial development process in the past years has been the absence of a strong and virile SMEs sector attributable to the reluctance of banks especially commercial banks to lend to the sector. Commercial banks through their intermediation role are meant to provide financial succour to SMEs. Prior researchers have identified lack of finance as a threat to the performance of SMEs. For SMEs to perform their role in the economy, they need adequate funds in terms of short and long-term loans (Ohachosim, Onwuchekwa&Ifeanyi, 2013).

Adequate financing of Small and Medium Scale Enterprises is paramount to their survival, financial constraint is one of the main reasons Small and Medium Scale Enterprises fail in Nigeria. Osoba (1987) argued that financing strength is the main determinant of small and medium enterprises growth in developing countries. There is no gain saying that finance would boost the performance of Small and Medium Scale Enterprises if adequate and optimally utilized. The dearth of funds in these businesses is capable of crippling their operations. Lack of funding for SMEs creates obstacles in allowing them contribute to economic growth and development. Onugu (2005) ranked access to finance as the second problem faced by Small and Medium Scale Enterprises in Nigeria. Commercial banks are often reluctant to lend to Small and Medium Scale Enterprises because of the perceived risky nature of Small and Medium Scale Enterprises by them. Analysis of the annual trend in the share of commercial bank credit to small-scale industries indicates a decline from about 7.5 per cent in 2003 to less than 1% in 2006 and a further decline in 2012 to 0.14 per cent (Sanusi, 2013). The decline shows that commercial banks have less preference to lend to Small and Medium Scale Enterprises. The main identified gap that necessitated this study is the perceived the role of commercial banks in financing Small and Medium Scale Enterprises in Nigeria.

STATEMENT OF THE PROBLEM

There are numerous problems that hinder the growth of small and medium scale enterprises in developing countries. Lack of access to credit hinders the growth and development of SMEs. Also is the problem of cutthroat competition of the established industries and the small and medium scale enterprises also are a critical problem. Most times commercial banks do not follow the credit guidelines and other related policy issues affecting the small-scale enterprises in Nigeria. In some instances where commercial banks obey policy guidelines, they charge very high interest rate. The problem of credit to small scale industries may not necessarily be as a result of financing insufficiency but rather for some other reasons among which are.

Insufficient preparation on the part of small scale entrepreneurs in their request for credit assistance.

Information gaps as to range of funding institutions and scope of services available in these institutions

Moreover, servicing of small business accounts is relatively experience, risky and difficult to monitor with low turnover of account.

However, the parishioners in the sector small scale industry do not display competence in preparing justification for their project. Most of them do come up with cash flow projections, projected balance sheets, among others. They are based on personal rudimentary in formation and speculation. At times when they seek the advice of consultants, the outcome that are made figures project based on assumptions which are most of the time unrealistic. As a result such proposals are out rightly rejected by banks when credit demands in this sector are not in compliance in this government monetary policy and credit guidelines which must be adhered to by banks.

1.3 RESEARCH QUESTION

What are the roles of commercial banks in financing small scale Enterprises in Nigeria?

What are the impact of commercial Banks on small and Medium Scale enterprises in Nigeria?

What are the effects of financing on the performance of SMEs?

What are the problems encountered by SMEs in obtaining finance from commercial banks?

What is the relationship between the performance of SMEs and economic development?

What are the possible ways in which commercial banks can help in the success and advancement of small and medium scale enterprises?

1.4 AIMS OF THE STUDY

The major purpose of this study is to examine sport diplomacy and regional integration. Other general objectives of the study are:

To examine the role of commercial banks in financing small scale Enterprises in Nigeria.

To examine the impact of commercial Banks on small and Medium Scale enterprises in Nigeria.

To examine the effect of financing on the performance of SMEs.

To examine the problems encountered by SMEs in obtaining finance from commercial banks.

To examine the relationship between the performance of SMEs and economic development.

To suggest possible ways in which commercial banks can help for the success and advancement of small and medium scale enterprises.

1.5 RESEARCH HYPOTHESIS

Hypothesis 1

H0: There is no significant role of commercial banks in financing SMEs in Nigeria.

H1: There is a significant role of commercial banks in financing SMEs in Nigeria.

1.6 SIGNIFICANCE OF THE STUDY

This study will highlight problems associated with the role of commercial banks in financing small scale industry in Nigeria. It will give information on the possible areas for improvement. Furthermore, the study will help commercial banks to assess their role in financing small scale industry in Nigeria. Moreover, suggestions and recommendations made in this paper will help policy makers formulate new economic policies to maintain or modify the existing one. It will equally serve as a guideline to researchers who may wish to research this study in the future. It will also help small scale entrepreneurs to make sufficient preparation in their request for credit assistance. It will guide the entrepreneurs in making credits demands that are in compliance with government monetary policy. The last but not the least it will help the entrepreneurs to display competency in preparing justification for their project. It is rear to see most of them coming up with cash projections, projected balance sheets.

1.7 SCOPE OF THE STUDY

The study is based on role of commercial Banks in Financing SMEs in Nigeria, case study of Lagos State.

1.8 LIMITATION OF STUDY

Financial constraint– Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint– The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8 DEFINITION OF TERMS

Small Scale Enterprise: An enterprise with a labor size of 11-1000 workers or a total cost of not more than 50 million including working capital but excluding cost of land (Sule, 1986:207).

Medium Scale Enterprise: An industry with a labor size of between 10-300 workers or a total cost of over 50 million but not more than 200 million including working capital but excluding cost of land (Clifford, 1972:85).

Commercial Bank: A financial institution that acquires deposit from savings, surplus unit and give out loans to savings deficit units.

Sole Proprietorship: Is a business owned and conducted by one person presumably assisted by one or more persons for intakes wife and children.

Enterprises: It means any establishment engaged in production, repairs or services to satisfy human wants and make room for profits.

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